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Souq mentality: how good is the deal?

Comment: Amazon’s acquisition of Souq.com has been hailed by many, but have we truly considered all its aspects?

Online marketplace: The GCC’s e-commerce industry is projected to grow to $20bn by 2020, according to a report by global consultancy firm AT Kearney.

Things are heating up in the e-commerce sector, with the announcement of Noon, Amazon’s purchase of Souq and, most recently, Mohamed Alabbar’s acquisition of JadoPado. Many see the arrival of Amazon as a positive sign, both for the present and for the future, conjuring images of a fairy godmother who will transform our digital ecosystem for the better.

Considering the very mixed bag of results from international acquisitions, like the Yahoo/Maktoob deal, LivingSocial’s takeover of GoNabit or Emap’s purchase of AME Info, circumspection would be advisable. M&As may well be the fastest and easiest way to enter a market, but when cultures, infrastructure and regulations differ, buyers often fail to radically improve the acquired platforms.

Nonetheless, the acquisition of Souq certainly plays into the narrative that the region’s e-commerce is maturing, with the prediction that the sector will grow in the GCC to $20bn by 2020, up from $5bn in 2015. We’re still far from the world average of 3.11 percent of GDP though, barely touching 1 percent in the GCC. The sector is certainly dealing with several challenges, including the preference for cash-on-delivery, the lack of trust in online platforms and the challenges with regional logistics, all acting as a glass ceiling to e-commerce.

Amazon’s entry into the region has widely been portrayed as a defining moment. VCs celebrated the first mega regional exit, entrepreneurs dreamed of an opening of cash floodgates and consumers rejoiced in anticipation of greater choice, lower prices and faster deliveries.

There are some in the tech community, however, who see the rumored price tag of about $650m, which is two-thirds of the previous valuation and below the last offer received, as a worrying sign. Despite the interest from local and international parties, you can’t help the feeling that we’re selling our crown jewels cheaply. After failing to make a dent in China and committing $5bn setting up its own operation in India, Amazon is trying a new approach: buying an existing e-commerce business. The US giant has only recently increased the international focus in its acquisition strategy and has yet to make a profit out of its non-US businesses. Last year, Amazon made a loss of more than $1bn in its overseas markets, almost double that of 2015. With Souq believed to have yet to turn a profit, Jeff Bezos may be making a bet on the long-term, but the odds don’t look great.

Not only is Souq going for pocket change by Amazon’s standards, it’s also going abroad. If it ever turns a profit, the money will go back to the USA rather than being invested here. There are very deep pockets in the region and instead of choosing to invest in Uber, for example, Middle Eastern investors could have easily backed a local champion. It could have also been IPO’d. The benefits for the regional ecosystem would have been greater and the competition within the sector fairer.

The concern is that instead of stimulating competition, what this deal could bring is disruption, with potentially a lot more pain than gain.

Brands risk unfair competition: It’s a well-known fact that margins on gadgets, the mainstay of most e-commerce platforms, are lower than for other goods. While this explains Amazon’s and others’ foray into fashion and grocery products, Bezos has pushed the logic further. Today, Amazon has its own and private-label brands for such common household items as coffee, diapers and other groceries. Perishable goods, including baby food, tea, coffee or spices and non-perishables like laundry detergent go under brand names such as Happy Belly, Wickedly Prime and Mama Bear. This would be fine in principle but consider how Alexa, Amazon’s digital assistant, has been found to offer ‘Amazon Basics’ products in key categories, pretending other brands aren’t available even when they actually are. This indicates Amazon actually plays against some of the brands on its site.

Retail investments under threat: e-commerce has long been accused of threatening brick-and-mortar retail. We may only be seeing the beginning of the trend here, but the prospect is hardly going to delight the many retailers and mall operators who are heavily invested in the region. In the GCC alone, some 2 million sq m of retail development are under development. These could be at risk when we consider that this year, Amazon will surpass Macy’s, which plans to shut 100 stores, to become the largest seller of apparel in America. While pushing retailers and distributors to use its online platform, Amazon is making the reverse journey. Since 2015, it has opened a number of shops, including bookstores that sell its many gadgets and Amazon Go stores without cashiers.

Short-circuiting logistics channels: Faster deliveries have long been a goal for both consumers and e-tailers. One solution is more warehouses, another is multiple shipping networks. For Amazon, this has meant building their own delivery network, including leasing planes, building an air freight centre in Kentucky and acting as a freight forwarder for Chinese suppliers.

And there’s the small matter of autonomous drones. In India, it created a network of 13,000 corner stores to act as delivery and pick-up points. It appears that Amazon is bypassing established logistics networks, including the raft of on-demand delivery services.

A real challenge to traditional TV: Besides e-commerce, cloud services and technologies, such as Artificial Intelligence, Amazon has followed Netflix into content streaming under the banner of Prime Video.

Having recently gone global, it now also competes locally with OSN Play, Starz Play Arabia and icflix as well as traditional broadcasters. By promoting new viewing habits, Prime Video will eventually lead to a further reduction in the production budgets by established broadcasters. As it’s unlikely to work with local production houses, Amazon will also endanger the content production chain in the region.

With budgets close to $5bn, Amazon has the firepower to create or secure powerful content, such as streaming rights for sporting events. Since its content is funded by product sales rather than ad sales, the playing field is far from level.

The final blow to the long tail? The media landscape is already being profoundly altered by Facebook and Google. Add Amazon to this and it’s clear we have reasons to worry. In an interview, Bezos admitted that his company monetises content by converting their subscribers’ interests across categories in to trials and purchases. Closing the loop between its content, its programmatic ad solution and product purchases, Amazon can create further imbalance in the market and drain it of valuable advertising investments.

Local media owners will end up fighting over an ever smaller pie, accelerating their demise and endangering the diversity and plurality of our media landscape.

There’s even more at play. Souq has so far been unable to monetise the customer data it owns, which means that there will be a steep learning curve to embrace Amazon’s approach in this field. What’s worse, data, the world’s most valuable resource, from our region and about our consumers will now be owned by a foreign organisation and this without oversight or regulation. Section 215 of the Patriot Act even gives the US government power to collect all forms of data, including search history. Beyond the invasion of privacy, this has the power to alter the nature of competition.

Competition is a good thing of course and needs to be welcome, as long as it adds value to the market rather than being destructive. With Souq in the hands of an international giant, a mere dot on its map, we lose its potential to build our tech sector. Unlike other global giants, Amazon tends to operate in a closed circuit instead of providing valuable knowledge transfer to and collaborating with local players. Its profits, should there be any, are more likely to provide dividends in the USA or fund developments in Amazon’s many ventures than be reinjected in the local or regional economy. In Souq, we had a powerhouse that could have led a whole industry, infrastructure and digital ecosystem. That mission will now fall on others.

A powerful and thought-provoking insight, Elie. So - who are the 'others' you refer to above? And how do we work together to combat the threats and preserve a strong, dynamic regional identity?

Gulf economies have always managed to keep their local identities and prerogatives though a combination of 'carrot and stick'. Faced with the borderless power of the internet/global tech giants, how can they - and we - maintain that equilibrium?